How Disney May Have Tipped Its Hulu Hand Earlier Than Planned

Summary:

• As many investors are aware, Disney and Comcast have been playing a chess match with each other over the future of Hulu, despite a fairly iron-clad agreement.
• Disney holds majority control with the plan being to buy out Comcast’s shares in 2024. But recently those plans were less certain in the midst of cost-cutting by the Mouse.
• Many believe Disney should stay the course as they continue to remain aggressive with streaming and that was essentially the message touted during its latest earning call.
• However, while investors have a new sense of clarity, there were signs prior to the call that Disney had already made up its mind to continue in this direction.
• One under-the-radar sign was around the company fully acquiring popular drama “9-1-1” from FOX – a move that wouldn’t make sense if they were about to switch streaming approaches.

It’s TV’s mad season – i.e. upfront time – where networks of all types (linear and streaming) are out selling themselves to advertisers and consumers.

Part of what makes this time of the year so crazy is the flurry of deals that are made which catch insiders off guard. Shows that are “safe” aren’t and shows that are “on the bubble” live for another season – up is down and down is up.

That’s the upfronts for you.

This year we not only saw the above scenarios happens, but we saw a unicorn of a deal that was interesting when it was announced the other week, but now in retrospect may have actually been an early signal from Disney (NYSE:DIS) about what it would soon announce in its earnings report.

First as always, some background.

As many of you know, Disney and Comcast (NASDAQ:CMCSA) have been playing a chess match with each other over the future of Hulu. Under terms arranged by then (and now current) CEO Bob Iger, Disney took over majority ownership of Hulu with Comcast in a minority role until 2024 when Disney would buy out those remaining shares.

Yet now Disney finds itself in cost-cutting mode and the cost of that deal may be less beneficial than once thought. Unfortunately for Disney, Iger made the deal fairly iron-clad and legally it would be hard for either side to walk away. For Comcast’s part, its (then) CEO Jeff Schell wasn’t looking to change the terms and seem committed to holding Disney to the agreement.

Granted Schell is no longer part of the equation and it’s anyone’s guess what his successor (temporary or not) will opt to do… but you could have made an argument on both sides.

You can’t really do that with Disney.

Iger made the deal because he was all-in on streaming and he still is – but lately he has had to pull back the positivity if he wants to re-negotiate the terms. He also had to contend with former CEO Bob Chapek’s comments that essentially said there was no question the deal would be done as planned.

While Iger manages with a “close to the vest” style, Chapek did not.

Regardless, Disney has embedded Hulu so deeply into its arsenal that removing it would, in the long run, cost them more than this deal would (should it go through).

I’ve talked about it prior, but by installing Hulu into the Disney+ bundle it makes it hard to pull it without the whole thing coming apart. Hulu helps prop up both Disney+ and ESPN+ subscriptions in a variety of ways. We know Iger and Disney also see that value, but lately it has become about gamesmanship.

That gamesmanship abated a bit during earnings when Iger announced the long-rumored combining of Disney+ and Hulu into one larger service. Yes, both (and ESPN+) will still be available separate (as they should be), but this re-invents and in some ways evolves that original “bundle” approach.

It also instills Hulu even deeper into the fabric of Disney’s streaming plans… something Iger essentially admitted as he walked back some of that “doubt” he had tried to sow.

However, in the midst of the recent upfront madness there was actually an early sign that Iger and team were leaning in this direction that many investors likely (and easily could have) overlooked.

In the run-up to the various network presentation to advertisers it was announced that FOX’s 9-1-1 and 9-1-1: Lone Star spin-off would be coming back, but with a twist. While Lone Star would stay on FOX, 9-1-1 proper would be shifting to ABC.

It’s not rare anymore to see a series switch networks, but it’s extremely rare to see a series and its spin-off spilt up. Yes, it has happened before but usually it’s to a sibling channel (i.e Law & Order: Criminal Intent which switched from NBC to USA Network) vs. a rival.

The 9-1-1 case is unique.

You may remember when Disney bought out a large part of FOX’s assets, the linear broadcast network was not part of the deal, but the network’s 9-1-1 and Lone Star were part of the deal as they’re through 20th Century productions. Yet FOX continued to air the show and pay a licensing fee to Disney for that right.

And that made sense because it’s not just “a” series, but 9-1-1 is FOX’s most-watched and most-popular series – but it’s also its most expensive, which is why the network is now deciding to cut bait.

So why would a cost-centric company like Disney be taking on that expense?

Yes, it wants to stockpile projects that are easy to re-start once the writer’s strike resolves, and yes, the series is a big draw that will likely immediately become ABC’s most-watched scripted series – but in this streaming-first culture, the other reason is Hulu.

9-1-1 proper has also been one of Hulu’s strongest performing shows.

The series staying on the air represents a lot of money to Disney, and in a streaming landscape where nothing stays on the air for more than a few seasons, you have a proven commodity across both models that continues to over-perform.

The other point being though 9-1-1 is NOT a Disney+ or ESPN+ show – it falls squarely into that adult Hulu bucket. This is the type of show that made Disney invest so heavily in 20th Century and Hulu as brands in the first place.

Disney needs a repository for profitable series and movies that are squarely aimed at older audiences. Whether that’s Handmaid’s Tale, Only Murders In The Building, The Dropout or Dopesick, the play has worked bringing in both subscribers and awards.

With this move Disney is continuing to shore up key players on its streaming roster – and building out what would be the more adult section of its portfolio (and as we now know this new combined platform).

The deal itself should have sent up a few antennas as it wouldn’t make sense to take-on the 9-1-1 costs just for a linear play.

Streaming had to play a role and Hulu was the natural home.

Disney is far too smart of a company to spend lavishing on extending the life of a series only to just sell-off streaming rights to a rival like Comcast/Peacock (or a potential third party taking over the deal).

Yes, it could have negotiated a cut of things, but that’s not really Disney’s style. And while it has been suggested they may eventually license out more of their content, why start with a valuable current series that can help build your own subscriber levels at a crucial time?

The company has long wanted its streaming services and networks to be extensions of each other – it’s the connected universe of it all. This move helps continue that goal which can only happen if the pieces stay in place.

Yes, there’s still some work to be done to shore up a deal with Comcast, and anything can still happen, but we’re now seeing the clearest signs yet that the Mouse is staying the course.

You can understand Disney’s approach given it wants to get the best deal it can with Hulu, but that “will they/won’t they” question was never really a question.

Sometimes in the streaming world where’s there smoke, there’s not always fire, and that’s important for investors to understand.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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